10 Economic Myths That Need To Be Corrected

We can argue over the best label for the economic system in the United States of America, but there can be little argument that “capitalism” or “free market” are among the worst and most inaccurate labels for what we have in America today. With quantity and price controls rampant throughout multiple, major U.S. markets, regulations galore, and some of the highest corporate tax rates in the world, the United States is a heavily controlled, heavily regulated, and heavily taxed mixed market economy. Of the ten planks in the Communist Manifesto, seven have become policy in the United States, and the government is working on the remaining three! Can that be fairly characterized as capitalism? Take a look at this list of U.S. government agencies, notice just how unbelievably many of them there are, and observe just how many aspects of life in America they regulate. It’s a Soviet commissar’s dream, and any true capitalist’s nightmare!

2. Deregulation in the 90s led to the recent economic crash.

Okay, Clinton signed one law in the 1990s that lifted federal regulation of one aspect of financial markets, and critics of deregulation like to say “We deregulated financial markets in the 1990s,” as if we completely overhauled the entire federal regulatory system, but that’s a big stretch and very misleading. Booms and busts themselves are actually caused by government intervention into the economy. Libertarian economists who understand this (many of them belonging to the “Austrian School of Economics”) have been incredibly accurate predictors of economic booms and busts. They predicted the Great Depression, the stagflation of the 1970s (that their opponents had always claimed was impossible), and the most recent credit and housing collapse. Their predictive powers are the result of their accurate theories and understanding. Here, I’ll let “F.A. Hayek” rap it for you.

3. We need more regulation to keep big corporations in line.

If that were true, why don’t more big corporations support deregulation? Instead they seem to support more big government. Go ahead, browse OpenSecrets.org for yourself and see which politicians get the most donations from big corporations. The fact is, regulations– like most laws in this country– are written by corporate lobbyists to give big corporations an advantage over small businesses that do not have the resources or money to comply with costly regulation, putting them out of business and handing over their market share to the big companies, all by way of government regulation. Critics of moneyed corporate interests contradictorily believe that these interests pull the strings of government and that more government regulation will reign in these interests. Which one is it?

Imagine a swimming pool. You take a bucket to one side of the swimming pool and fill it up with water. Then you walk to the other side of the swimming pool and empty it there. How many times would you have to repeat this to raise the total level of the swimming pool? Answer: It is impossible to raise the level of the swimming pool by removing water from one end and pouring it into the other.

5. The TARP Bailouts were necessary to prevent the economy from crashing.

When conservatives make this argument, ask them why they think free markets would have failed to do a better job of resolving this problem than government. Ask them why they support socialism and point out that the TARP bailouts socialized corporate losses by spreading them out to the rest of society. Also ask them why they support welfare and point out that the bailouts were an example of welfare, and that they incentivize more unproductive behavior the same way conservatives feel that welfare for the poor does.

When social democrats make this argument, ask them how they could support taking money from the working middle class and poor to give to rich, Wall Street banks. When they answer, as Obama did in one 2008 presidential debate, that it was necessary to keep businesses running so they could continue to employ the working middle class and poor, say: “So you’re arguing that if the government gives money to the wealthy, it will trickle down to the poor?? Now you sound like a right-wing Republican!”

6. Don’t free market supporters want to bring us back to the gold standard?

First of all, even if this were true, what would be so bad about that? Free market critics will act as if proponents are backward and unsophisticated for supporting a gold standard currency, but we should point out that fiat currency is nearly as ancient as currency itself, and that centralized governments have been inflating currency for centuries with the same result each time: monetary collapse, often followed by civil disorder. But secondly, this is a myth. Most free market proponents do not advocate some kind of government monopoly gold standard like we had over a century ago because it can be all too easily manipulated; they actually prefer what can be called a free market of currency that allows individuals to decide for themselves what currency is and how much they trust it.

7. We need to protect American businesses from foreign competition.

Because protectionist economic policies force American businesses and consumers to pay higher prices for certain things (like steel or sugar) than they would have to pay in a free market, most economists agree that such policies have the effect of a net economic harm to the domestic economy and are overtly anti-consumer. And it is actually protectionist policies that put Americans out of work by causing this net economic harm to the growth of the domestic economy.

8. Capitalism exploits labor.

Actually, since the advent of more capitalist economies, the rate of return on capital (how much profit you can make by investing in capital) has remained steady, as has the rate of return on land (rents from real estate) when compared to the explosive growth in the rate of return on labor (hourly pay). Do workers in more capitalistic countries work harder than their counterparts in less capitalistic ones? They probably work less hard, for fewer hours, and in better conditions. So why are they paid more? Because capital has made each hour of their labor vastly more productive. Capital and capitalism have done more for the laborer than any other development in human history.

9. We need government to provide things that free markets can’t.

Wrong. No we don’t. Not for lighthouses and national defense. Not for dikes. “Public goods” is simply a concept that has been used as the theoretical basis to justify a transfer of wealth from hard working, enterprising small businesses and laborers to moneyed special interests who can provide these so called public goods on the terms set in their super sweet, lobbyist-written government contracts.

As for “negative externalities,” the argument that negative externalities are examples of market failure does not necessarily prove the necessity for government intervention, and does nothing to address the possibility unavoidable reality of government failure. Just one example of government failure, for instance, is unintended consequences. There is a free market solution to negative externalities, however, which is using our system of civil law to enforce and protect private property rights.

10. We need government to prevent monopolies from forming.

This is a final shot that critics of free markets will always throw out at you when they have nothing else to go on because they’re sure you’ll agree or have no answer. The very best answer to it I have ever encountered is in Ayn Rand’s book: Capitalism, The Unknown Ideal. In it, a very young Alan Greenspan (before he sold out) wrote an essay called “Anti-Trust” which demonstrates how theoretically and historically, it is actually only government intervention that can create a true, coercive monopoly, not the free interaction of individuals in an unregulated market. You can listen to the first half of this essay in audio format here. Those of you with no scruples about copyrights can read the entire essay here (but I highly recommend you buy the entire book– I daresay it’s one of the most important economic books ever written). Milton Friedman also makes his case here, listing multiple examples of monopolies created by government intervention.